Howie Hubler of New Jersey: The Return of a Subprime Villain

Halfway through this month’s 60 Minutes interview with the financial journalism deity Michael Lewis, a snapshot of a half-grinning banker in a pinstriped suit filled the screen. With a thick neck and soft face, mouth turned tightly upward, the former mortgage bond trader Howie Hubler smiled out unknowingly at 12 million viewers.

In his nice New Orleans drawl, Mr. Lewis said that this banker lost Morgan Stanley about $9 billion. “More than any single trader has ever lost in the history of Wall Street. And no one knows his name.”

They do now. Thanks mostly to that interview and Mr. Lewis’ The Big Short, a kind of recession-era sequel to his Wall Street classic Liar’s Poker, Howie Hubler has become an unwitting icon of the financial crisis. Even though he made a shrewd bet against subprime loans, he offset it by gambling hugely on slightly better mortgages that turned out to be extraordinarily worthless. Nevertheless, he left the bank with several million dollars, the book says, retiring to New Jersey with an unlisted telephone number.

A Wall Street villain’s story line, just like a comic-book bad guy’s, has distinct scenes. There’s the early decency, the sour turn, the grand act, the escape and then the disappearance. But what sometimes comes afterward, a quiet return, can be the most dramatic of all.

“I ONLY KNOW HIM as a good person. And I’m sure he’ll come out on top, basically, because of who he is. But it’s hard to analyze his world,” said the banker’s father, a New Jersey real estate broker named Howard Hubler Jr. His son is technically Howard Hubler III. “The other guy was the toughest of the three. He died at 97, and I never got a word in.”

The Wall Street son is tough, too. A former Montclair State College football player, he’s described in The Big Short as “loud and headstrong and bullying,” the type to react to any intellectual criticism of his trades by telling the critic to get the hell out of his face.

But what’s a personality quirk when you’re a top Morgan Stanley bond trader? He was good at what he did, and he was smart. By the end of 2004, he was skeptical of the subprime mortgage business, and craved new ways to bet against it. He found Morgan Stanley customers willing to sell him credit default swaps on pools of subprime mortgage loans, which, though there are many poetic ways of putting this, was like taking out an awesome insurance policy on a house you’ve built in quicksand.

But the economy’s fall took a while to begin, which was a problem for Mr. Hubler—who in April 2006 was put in charge of his own Morgan Stanley hedge fund, called the Global Proprietary Credit Group. To make up for the millions of dollars that it cost to carry his subprime bets until the bad times hit, he sold insurance on slightly better mortgages. He wagered on a disaster he clearly saw coming, and then against a worse disaster he was blind to—agreeing to insure the house next door, prettier but in the same sand. And because insuring something that’s less risky is less lucrative, he had to sell several times the amount of swaps that he himself had bought.

Before the fall, The Big Short reports, Mr. Hubler’s group felt offended when Morgan Stanley’s chief risk officer ordered tests to see what might happen to their bets if defaults caused losses of 10 percent to their subprime pool, which they thought would never happen. The coming drop was four times worse. The New York Times said his wagers cost Morgan Stanley $10 billion. Bank head John Mack called it “embarrassing for me, for our firm.”

“He’s allowed to resign from Morgan Stanley and he takes with him millions of dollars in back pay,” Mr. Lewis answers. “Tens of millions of dollars in back pay.”

BUT LIFE GOES ON for fallen Wall Street executives. Lehman’s ex-CFO Erin Callan reportedly spends a lot of time at an East Hampton spinning studio; Bear Stearns’ Jimmy Cayne is said to be playing a lot of bridge; and Merrill Lynch’s Stan O’Neal sits on the board of a massive aluminum maker. Meanwhile, former top mortgage brokers like Jack Soussana have started loan modification companies that charge upfront fees to borrowers in exchange for a promise to get lenders to lower payments. “I’m not a shady person,” he told The Times last year. “We just changed the script and changed the product we were selling.”

Across the Hudson River, in an office suite in Rumson, N.J., Mr. Hubler has quietly slipped back into the mortgage business. According to marketing materials, he started a firm with former Morgan Stanley colleagues to advise mortgage lenders whose borrowers are threatening to walk away from homes that are worth less than what’s owed on them.

They’re called the Loan Value Group.

Last month, the company announced a patent-pending program that promises cash rewards to homeowners if they stay and fully pay off their mortgages. “It is no different from me putting $20,000 in a sack on a kitchen table and saying, ‘This is your money,’” Frank Pallotta, the firm’s executive vice president, and a former Morgan Stanley banker, told me this week. “I can’t talk through numbers. But we’ve signed up many. We’re live and we’re rolling.”

Mr. Hubler’s firm also includes his old proprietary trading squad’s executive director. “Default is rational for many borrowers: While they forfeit their home, they rid themselves of a mortgage liability of even greater value,” its Web site says, referring to the millions of American households who owe more on their homes than the homes are worth. One in four residences with a mortgage is currently underwater in this country.

Loan Value Group charges fees to lenders in exchange for organizing a reward that provides incentive for homeowners not to default. Because simply leaving can make financial sense, the company says, the solution is to target a borrower’s pocketbook.

Mr. Hubler would not speak for this article. “He’s pretty much adamant about not talking about this,” a spokesperson said. Neither would Richard Santulli, the company’s newly appointed chairman, who was CEO of the fractional aircraft ownership company NetJets until last August; nor the board member Michael Goodman, the former CEO of J.G. Wentworth, the lump-sum payment firm (“we understand it is hard to wait”!) that filed for bankruptcy last year.

But Mr. Pallotta, the executive vice president, was willing to speak. “People feel as though, you know, Howie was the problem and Wall Street was the problem,” he said. “And you know what? If there was a question of integrity, or trust, or the ability to bring value to a financial situation, we would not be this far.” When the firm’s rewards program was announced last month, Loan Value Group said it was already working with three hedge funds that own mortgages. “If they thought Howie was an S.O.B. or Frank was a BS artist, we wouldn’t have the traction.”

Asked about lenders they’re working with or borrowers who may stay in their underwater homes because of the promise of a reward, he said that customers want to be anonymous. “I haven’t seen tears,” he said, “but I’ve seen people say, ‘I can’t believe I got this.’”

But will struggling homeowners allow themselves to be lured into staying by a company led by former subprime mortgage bond traders? Especially one whose chief executive is being held up as an iconic and imbecilic villain in Mr. Lewis’ interviews with Charlie Rose, Maria Bartiromo, Erik Schatzker and Mr. Kroft? “We have no desire, we never did from the beginning, to sell the Loan Value Group name,” Mr. Pallotta said. “If you win the lottery, do you care if it’s Scratch and Pay or Scratch and Sniff or New Jersey Lotto? The money’s there.”